On September 18, 2019, the Governor signed AB 5, which significantly impacts independent contractors’ classification. It not only changes the standards in which employers use to determine whether a hired contractor will be classified as their “employee”, it expands the application beyond wage order claims to all provision under the state Labor and Unemployment Insurance Codes. It would also entitle these newly classified employees to Workers’ Compensation benefits under the contracting employer. The bill does not permit an employer to reclassify an individual who was an employee on January 1, 2019 to an independent contractor due to the bill’s enactment.
The bill was passed in the aftermath of the Dynamex decision, a California court case that upended entire industries by eliminating the traditional “control” test for independent contractors, and ruling that the law in California is that the so-called “ABC test” controls these determinations.
Under AB 5, a contractor is presumed to be an employee of the contracting employer unless the employer can demonstrate that the worker meets all of the three elements of the “ABC Test.” This turmoil affects owner-operator truck drivers, and in the dairy industry, many service providers such as independent breeders, hoof trimmers, and similar occupations. The law becomes effective January 1, 2020.
What is the “ABC Test”
Under Dynamex, and embraced by AB 5, a person providing labor or services in exchange for money will be considered an employee (rather than an independent contractor) unless the hiring employer demonstrates all of the following conditions are satisfied:
- The person is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of work and in fact.
- The person performs work that is outside the usual course of the hiring entity’s business.
- The person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.
This new three step analysis is narrower than the previous multi-factor Borello test, which focused on control of the manner and method of performing the work. AB 5 has created some specific exemptions and carved out certain industries, but dairy is not one of them.
The “ABC Test” is not only narrower but could be problematic for employers who contract for services, that are the same or similar to their own business, such as breeding and animal care services in the dairy and livestock industry. In order to pass the second prong of the test, a company must show that the worker is preforming work outside of the usual course of the hiring company’s business. This test also requires contracted workers to have independently established businesses.
Fortunately, there is another layer to AB 5 for relationships that fail the “ABC test.” There is a business to business exemption that creates the opportunity to preserve many historically independent business relationships.
Business-to-Business Contract Exemption
The “ABC Test” will not apply to a bona fide business-to-business contracting relationship under the following conditions:
The business entity formed as a sole proprietorship, partnership, LLC, LLP, or corporation (“business service provider”) contracts to provide services to another such business (“contracting business”), the determination of employee or independent contract status of the business service will be governed by historical control test if the contracting business demonstrates that all of the following criteria are satisfied:
- The business service provider (BSP) is free from the control and direction of the contracting business entity in connection with the performance of the work, both under the contract for the performance of the work and in fact.
- The BSP is providing services directly to the contracting business rather than to customers of the contracting business.
- The contract with the business provider is in writing.
- If the work is performed in a jurisdiction that requires the BSP to have a business license or business tax registration, the BSP has the required business license or business registration.
- The BSP maintains a business location that is separate from the business or work location of the contracting business.
- The BSP is customarily engaged in an independently established business of the same nature as that involved in the work performed.
- The BSP actually contracts with other businesses to provide the same or similar services and maintains a clientele without restrictions from the hiring entity.
- The BSP advertises and holds itself out to the public as available to provide the same or similar services.
- The BSP provider provides its own tools, vehicles, and equipment to perform the services.
- The BSP can negotiate its own rates.
- Consistent with the nature of the work, the BSP can set its own hours and location of work.
- The BSP is not performing the type of work for which a license from the Contractor’s State License Board is required. (This is construction work, governed by a different exemption)
Many established services can adjust their practices by entering into written contracts, making sure they have a business entity, obtaining a business license, advertising, and making sure they do business with multiple clients or customers. Many service providers in the dairy industry, such as breeders, hoof trimmers, and the like, already provide service to multiple dairies, and with a little bit of paperwork, can adjust their business practices to meet the twelve requirements of the exemption to maintain their independent business relationships.
This business-to-business exemption does not apply to an individual worker, as opposed to a business entity, who performs labor for services for a contracting business. For this reason, Raimondo & Associates generally recommends that the service provider form an LLC or corporation to maintain clarity as an independent business under the law. Also, these exemptions and the “ABC Test” do not apply to the relationship between a contractor and an individual performing work pursuant to a subcontract in the construction industry.
There will be many variations to compliance, and this article cannot address them all. But there are solutions, except for those relationships that are truly exclusive, which will have to become employment relationships. For consultation on specific circumstances, please contact Anthony Raimondo at Raimondo & Associates.
The goal of this article is to provide employers with current labor and employment law information. The contents should not be interpreted or construed as legal advice or opinion. For individual responses to questions or concerns regarding any given situation, the reader should consult with Anthony Raimondo at Raimondo & Associates in Fresno, at (559) 432-3000.
By Anthony P. Raimondo, President/Owner, with special contributions from Jacqueline Rios